The short sale, a more attractive alternative to foreclosure for homeowners with negative equity, is often a difficult process, forcing lenders and owners to compromise on their conflicting interests. Lenders frequently refuse to allow a short sale, or take so long to authorize it that the house forecloses anyway. As lenders become more and more desperate to stop foreclosures, however, the short sale process may become more common. In Detroit, the number of short sales increased from 38 in January, 2008 to 175 in February, 2009.

first tuesday take: Servicers can not make money doing short sales; foreclosures earn the fees.

Until that financial barrier can be overcome, lenders will always work to turn short sales into foreclosures – unless loan cram downs see the light of day, allowing people to stay in their home at the same cost (the same loan amount) they would incur buying a replacement down the street (and thus the same home) at today’s price.

The requirement, made up by some lender along the way, that the owner on a short sale MUST show financial hardship (inability to pay) in order to get a discount on the mortgage at payoff on a property sale is nonsense. If the owner can not pay, then the property must go through a short sale or foreclosure. Right now, the servicing agent’s preference will be the foreclosure. If the owner is financially fit to pay, and thus without the ability to show hardship, it is to the owner’s financial advantage to default and call the lender’s hand, an exercise of the owner’s put option to force the lender to take the property with no liability to the owner. The public is getting wise. Let’s hope the lenders and their servicing agents get wise too, and aren’t blinded by their desire for fees.

Re: Short-sale process increasing in Michigan”, from the Detroit Free Press